Europe acts to strengthen banks

Germany, France and Spain have announced multi-billion euro rescue schemes to shore up their banks.

Germany has approved a package worth up to 500bn euros (£393bn; $683bn), France will spend about 350bn euros and Spain has set aside 100bn euros.

The bulk of this money will be used to guarantee lending between banks - part of a plan agreed to this weekend by the 15 nations that use the euro.

France and Germany will also use the cash to take stakes in ailing banks.

The moves helped to lift investor confidence, with stock markets rising worldwide.

Two-fold plan

The two-fold plan involves guaranteeing lending between banks and taking stakes in financial institutions - similar to the bank rescue in the UK announced last week.

The US is also getting ready follow in Europe's footsteps and purchase stakes in financial institutions.

"We are designing a standardised programme to purchase equity in a broad array of financial institutions," said Neel Kashkari, the treasury official in charge of the US government's $700bn bail-out package.

French President Nicolas Sarkozy said France would offer up to 40bn euros to provide banks with the financing they needed via a public company in which the state would the only shareholder.

"This is a massive engagement," he said.

He added that no financial institution would be allowed to collapse.

German Chancellor Angela Merkel said that the measures being taken would only work if they were accompanied by more robust regulation that will curb "market excesses."

"The package passed by the German government will serve the financial system and ought to serve to protect the citizens and not just serve to protect the banking system," she said.

Fund

Unlike France, Germany and Britain, Spain's Prime Minister Jose Luis Rodriguez Zapatero said that Spain did not need to take stakes in any banks because its banks were solvent.

However, last week the Spanish government announced the creation of a 30bn euro fund to buy assets from Spanish banks to help stabilise the lending industry and unfreeze credit.

At present banks are reluctant or unable to loan cash to fellow financial institutions due to fears about whether the money will be paid back.

It is this lending between banks that traditionally lubricates the banking system, freeing up cash for lending to private individuals and other firms.

Italy is also working on its own bank rescue plan.